Fees

Lesson

In this sub-section, we will discuss the various types of fees that investment advisers may charge their clients and the ethical practices and fiduciary obligations associated with compensation.

Practice Question #1

Which of the following fees is based on a percentage of a client's total assets managed?

A) Flat fee

B) Hourly fee

C) Assets under management (AUM) fee

D) Performance-based fee

Select an option above to see an explanation here.

A) A flat fee is a fixed fee for a specific service. B) An hourly fee is charged based on the hours spent providing services. C) An AUM fee is based on a percentage of the client's total assets managed. D) A performance-based fee is based on the investment performance of the client's account.

Terms

Fee-based compensation:: A combination of fees and commissions paid to an investment adviser for their services.
Flat fee:: A fixed fee charged by an investment adviser for a specific service, regardless of the amount of assets managed.
Hourly fee:: A fee charged by an investment adviser based on the number of hours spent providing services to a client.
Assets under management (AUM) fee:: A fee charged by an investment adviser based on a percentage of the client's total assets managed.
Performance-based fee:: A fee charged by an investment adviser based on the investment performance of the client's account.
Wrap fee:: A comprehensive fee charged by an investment adviser that covers all management, administrative, and trading costs.

Practice Question #2

Which type of fee is charged by a broker-dealer for executing a trade on behalf of a client?

A) Commission

B) Hourly fee

C) Performance-based fee

D) Assets under management (AUM) fee

Select an option above to see an explanation here.

A) A broker-dealer charges a commission for executing a trade on behalf of a client. B) An hourly fee is charged by an investment adviser based on the number of hours spent providing services. C) A performance-based fee is charged by an investment adviser based on the investment performance of the client's account. D) An investment adviser charges an AUM fee based on a percentage of the client's total assets managed.

Do Not Confuse With

Brokerage fees:: Fees charged by a broker-dealer for executing trades, separate from investment adviser fees.
Expense ratio:: The annual fee charged by a mutual fund or exchange-traded fund (ETF) for managing the fund's assets, which is separate from investment adviser fees.
Sales load:: A fee some mutual funds charge when shares are bought or sold, which is separate from investment adviser fees.
Commission:: A fee charged by a broker-dealer for executing a trade on behalf of a client.
Soft dollars:: Non-cash compensation from an investment adviser in exchange for directing client transactions to a specific broker-dealer.

Practice Question #3

Which of the following types of fees is NOT allowed for an investment adviser under the Investment Advisers Act of 1940?

A) Asset-based fees

B) Hourly fees

C) Performance-based fees

D) Flat fees

Select an option above to see an explanation here.

A) Asset-based fees are allowed and are calculated as a percentage of the client's assets under management. B) Hourly fees are allowed and are based on the time spent providing advisory services. C) Performance-based fees are generally prohibited under the Investment Advisers Act of 1940, except for certain qualified clients. D) Flat fees are allowed and are a fixed amount charged for a specific service.

Historical Example

In the late 1990s, a major investment firm was found to have engaged in unethical practices by charging excessive fees to clients without proper disclosure. This led to increased scrutiny of fee structures and disclosure requirements in the investment advisory industry.